We incorporate indirect bankruptcy cost into our analysis by assuming that operating income will decrease as a companys bond rating drops. If you allow for this effect, what will happen to the optimal debt ratio and why?

A. The optimal debt ratio will be lower due to the lower cashflows

B. The optimal debt ratio will be lower as the cost of debt is lower

C. The optimal debt ratio will be lower due to the higher cashflows

D. The optimal debt ratio will higher as the cost of debt is higher

E. The optimal debt ratio will stay constant at the cost of debt is constant